By John Hintze
Data has become the panacea in all areas of business, and banking is no exception. To manage their commercial real estate portfolios, banks are using data to populate dashboards that provide detailed and timely insights to guide their lending strategies as the pandemic continues to unfold and new risks emerge.
At a recent ABA Risk 2022 conference session, panelists discussed how they are addressing the current challenges facing the CRE portfolio, including concentration and credit quality risk. Neena Miller, chief credit officer at $12 billion OceanFirst Bank, headquartered in Toms River, New Jersey, emphasized the importance of “strong management information systems with good data governance and up-to-date information that is readily accessible to bankers and management “.
Over the past year, she said, OceanFirst has developed a dashboard to track key information about the bank’s CRE portfolio by region of origin in real time, including underlying property type floors and construction portfolio.
OceanFirst’s CRE concentration requires timely and meaningful risk monitoring information. Miller said improvements to the dashboard will soon provide daily information by static metro area.
“We’re in the process of enhancing our dashboard to track additional performance metrics, including loans with policy exceptions,” she says. “Having this information at hand allows us to quickly identify emerging trends.”
Zions Bancorporation, with $90 billion in assets and headquarters in Salt Lake City, has implemented internal credit management and core operating systems with the help of vendors that generate data that feeds dashboards. According to Ralph Pahnke, SVP at Zions, the real-time information will be used to generate regular reports for bank managers who adhere to the OCC’s stricter guidelines for institutions with assets greater than $50 billion.
Zions manages its CRE concentration by geography through its regional brands. “We closely monitor the portfolio and use data to look for changes in the loan portfolio, credit quality, risk class migrations and other metrics,” says Pahnke.
Miller adds that reporting to the bank’s board of CRE concentrations, policy exceptions and other metrics increased to monthly with the onset of the pandemic, but has recently reverted to quarterly intervals based on bank trends and the cycle of the pandemic. “However, management and executives have real-time information on the dashboard, including concentration levels,” she says.
models and judgement
Bank employees’ ability to work remotely during the pandemic has been impressive, Pahnke says, and the experience has enhanced their ability to get information to where it’s needed most.
The volatility over the past few years has made predicting CRE’s performance challenging, he says. The Bank uses data to assess the risk of its exposure to the CRE asset class and cap the level based on its assessment of the opportunities and risks.
“We deliberately limited our exposure to CRE categories where there is a higher perceived risk,” he says.
OceanFirst sticks to basic credit metrics like leverage, debt service coverage, credit structure, and pricing, Miller says. She added that within its geographic footprint, the bank competes with large money center institutions in metropolitan areas. These markets include New York, Philadelphia and, as of 2021, Boston and Baltimore.
Competition is particularly fierce in the industrial storage space, where OceanFirst remains bullish. The bank had already taken a conservative approach to office real estate prior to the pandemic given the ongoing work-from-home trend and sees the segment as selectively attractive with appropriate leverage and structure. Similarly, the bank is selective in retail, focusing on properties with grocery stores anchored.
“Before and after COVID, we generally consider hospitality to be a higher risk class and don’t actively track this category,” she explains.
Pahnke cites industrial real estate as one of Zion’s most active asset classes today. “Our community baking model has helped us during the pandemic,” he says. “We didn’t buy into large, syndicated deals and we made loans to clients we know.”
CRE risk assessment
In terms of measuring CRE risk, Miller says the risk management department provides independent market analysis that is used to support OceanFirst’s internal limits. The bank’s risk team is currently implementing third-party software to assess wrong-way risk within the CRE and broader loan portfolios.
“However, there is no substitute for the first line of defense, leadership in our diverse markets,” says Miller. She adds that the bank holds quarterly meetings to share “foot on the ground” updates and real-time information across regions.
Zions’ credit metrics have pre-determined triggers which, when achieved, will indicate potential concerns about the CRE portfolio and raise awareness among management and ultimately the board. “Up until two years ago, it was all about CRE credit growth, and more recently, the focus has been more on credit quality,” adds Pahnke.
Have examiners raised concerns? Regulators are constantly asking about CRE status, Pahnke says, most recently about the potential impact on the bank’s office portfolio. Regulators also ask what the bank does with the information it generates and what processes it follows to produce reports, as well as whether there are any follow-up actions and actions taken based on the reports.
Miller points to ongoing CRE discussions with regulators. OceanFirst follows inter-agency CRE concentration risk management guidelines to ensure it has the tools to monitor CRE portfolio risk, including comprehensive stress testing. Miller says the most recent stress test found the Federal Reserve to make seriously unfavorable assumptions of a 35 percent fall in collateral value, up from 30 percent last year.
“Given where we are in the cycle, and to a lesser extent the ongoing impact of the pandemic, we felt it was important to include this elevated haircut in our testing,” she says.
OceanFirst has also increased the granularity of its portfolio segmentation samples, assessing 11 different commercial loan pools in 2021 compared to three in 2020. “The revised approach ensures that the sample best represents the risk attributes of the entire commercial portfolio,” she says.
OceanFirst has also tested assumptions regarding future growth projections and its portfolio mix, Miller adds. The bank also tested outside of the main stress test sample to gain insight into smaller portfolios that may represent higher risk.
Regarding the structures of CRE deals, both Miller and Pahnke note that borrowers are seeking shorter guarantee periods and longer interest-free or IO periods. Miller says requests for longer IOs have surfaced over the past six to nine months, and that, along with more aggressive pricing, has given her the most concern.
“We lend less money when borrowers ask for longer IO periods, so the risk fits our risk profile,” Miller adds in a follow-up interview. “Pricing has become very, very aggressive and competitive – all banks are hungry for credit.”
John Hintze regularly writes for theABA Banking Journaland its digital channel ABA Risk and Compliance.